News Column

IMPERIAL HOLDINGS, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

May 8, 2014

The following discussion summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity, and cash flows of our Company as of and for the periods presented below and should be read in conjunction with the financial statements and accompanying notes included with this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors. See "Forward-Looking Statements."

Overview

We were founded in December 2006 as a Florida limited liability company and in connection with our initial public offering, in February 2011, Imperial Holdings, Inc. succeeded to the business of Imperial Holdings, LLC and its assets and liabilities. We own and manages a portfolio of 601 life insurance policies, also referred to as life settlements, with a fair value of $315.5 million and an aggregate death benefit of approximately $2.9 billion at March 31, 2014. The Company primarily earns income on these policies from changes in their fair value and through death benefits.

Convertible Notes Issuance

On February 21, 2014, we issued $70.7 million of 8.50% senior unsecured convertible notes due 2019 (the "Notes"). We plan to use a portion of the proceeds to strategically lend against portfolios of life settlements owned by institutional investors and anticipate that we will be able to enter into loan transactions where we would lend, as a first-priority secured lender, on a "last money in-first money out" basis, meaning that proceeds from the policies pledged as collateral under a loan that we make will first be distributed, after premium payments and fees to service providers, to pay outstanding interest and principal on the loan. Our expectation is that our participation in any such loan will be conditioned on our being granted a participation in the proceeds of the death benefits from the underlying portfolios. We anticipate that this strategy will generate meaningful short term cash flows. Such short term cash flows are material to the Company since the Company does not expect to receive meaningful distributions of proceeds from policy maturities that have been pledged under the Revolving Credit Facility (as discussed below) for up to the next five years. We have begun sourcing lending opportunities and will seek to deploy capital in 2014.

Section 312 of the NYSE Listed Company Manual requires, among other things, that we obtain shareholder approval in order for the number of shares of our common stock to be issued upon conversion of the Notes to equal or exceed 20% of the shares of our common stock outstanding before we issued the Notes (the "NYSE Limit"). Accordingly, we are seeking shareholder approval at our upcoming annual meeting on June 5, 2014 to issue shares in excess of the NYSE Limit. If we do not obtain shareholder approval, the number of shares of common stock that we issue upon conversion of the Notes will be subject to a "conversion share cap" (a 19.99% limit of the stock outstanding at the time of the issuance of the Notes) and we will settle the Notes through a "combination settlement" whereby we will settle a specified portion of the Notes in cash with the remainder settled in shares of our common stock up to the pro rata portion of the conversion share cap.

Until we obtain shareholder approval we will settle any conversion of the Notes through the combination settlement described above. As a result, we have bifurcated a conversion derivative that is embedded in the Notes and recorded it separately at fair value as a liability with changes in its fair value recorded in earnings. We recorded the difference between the principal amount of the Notes and the conversion derivative liability as a debt discount which is subsequently amortized to interest expense over the expected life of the Notes using the effective interest method. If we obtain shareholder approval in the second quarter of 2014 to exceed the NYSE Limit, we would expect to reclassify the conversion derivative liability to equity along with any unamortized transaction costs proportionate to the allocation of the initial debt discount and the principal amount of the Notes. In subsequent reporting periods, if the reclassification occurs, the Notes will be recorded at accreted value up to the par value of the Notes at maturity. The debt discount will be amortized into interest expense using the interest method, in an aggregate amount equal to the amount of the conversion derivative liability reclassified into equity along with any unamortized transaction costs.

During the three months ended March 31, 2014, in respect to the conversion derivative liability, the Company recorded a change in fair value loss of $2.1 million. In addition, the Company recorded $299,000 in interest expense related to the amortization of the debt discount and issuance costs.

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Portfolio Management

At March 31, 2013, our portfolio consisted of 601 life insurance policies with a fair value of $315.5 million and an aggregate death benefit of approximately $2.9 billion. Our subsidiary, White Eagle Asset Portfolio, LLC, ("White Eagle"), is the owner of 452 of these life insurance policies with an aggregate death benefit of approximately $2.3 billion and an estimated fair value of approximately $268.6 million at March 31, 2014. White Eagle pledged its policies as collateral to secure borrowings made under a 15-year revolving credit agreement (the "Revolving Credit Facility"), which will be used, among other things, to pay premiums on the life insurance policies owned by White Eagle.

While the liquidity risk associated with the policies that have been pledged as collateral under the Revolving Credit Facility has been significantly mitigated, any available proceeds under the facility's waterfall provisions will generally be directed to pay outstanding interest and principal on the loan, unless the lenders determine otherwise. Accordingly, there can be no assurance as to when the proceeds from maturities of the policies pledged as collateral under the Revolving Credit Facility will be distributed to the Company. The Company believes it may be at least five years before the Company receives meaningful distributions from these policies. As such, the Company must proactively manage its cash in order to effectively run its businesses, maintain the policies that have not been pledged under the Revolving Credit Facility and opportunistically grow its assets. The Company may in the future pledge and/or borrow against certain or all of the 149 policies that have not been pledged under the Revolving Credit Facility. It may also determine to sell all or a portion of these policies and, under certain circumstances, lapse certain of these policies as its portfolio strategy and liquidity needs dictate. Should it choose to maintain all of the policies that have not been pledged as collateral under the Revolving Credit Facility, the Company estimates that it will need to pay approximately $5.6 million to maintain these 149 policies in force through 2014.

During the quarter ended March 31, 2014, the Company sold six policies that were not pledged as collateral under the Revolving Credit Facility for gross proceeds of $3.1 million. Five policies matured during the quarter with an aggregate death benefit of $11.5 million. All five policies served as collateral under the Revolving Credit Facility. This amount is reflected in the Company's consolidated balance sheet under "receivable for maturity of life settlements" as of March 31, 2014.

Critical Accounting Policies Critical Accounting Estimates



The preparation of the financial statements requires us to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. We base our judgments, estimates and assumptions on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions and conditions. We evaluate our judgments, estimates and assumptions on a regular basis and make changes accordingly. We believe that the judgments, estimates and assumptions involved in the accounting for income taxes, the valuation of investments in life settlements, the valuation of the debt owing under the Revolving Credit Facility and the valuation of our conversion derivative liability embedded within the Notes have the greatest potential impact on our financial statements and accordingly believe these to be our critical accounting estimates. Below we discuss the critical accounting policies associated with the estimates as well as selected other critical accounting policies.

Fair Value Option

As of July 1, 2010, we elected to adopt the fair value option, in accordance with ASC 825, Financial Instruments, to record newly-acquired structured settlements at fair value. We have the option to measure eligible financial assets, financial liabilities, and commitments at fair value on an instrument-by-instrument basis. This option is available when we first recognize a financial asset or financial liability or enter into a firm commitment. Subsequent changes in fair value of assets, liabilities, and commitments where we have elected fair value option are recorded in our consolidated statement of operations. We have made this election for our structured settlement assets because it was our intention to sell these assets within the next twelve months, and we believe it significantly reduces the disparity that exists between the GAAP carrying value of these structured settlements and our estimate of their economic value.

We have elected to account for the debt under the Revolving Credit Facility, which includes its interest in policy proceeds to the lender, using the fair value method. The fair value of the debt is the amount the Company would have to pay to transfer the debt to a market participant in an orderly transaction. We calculated the fair value of the debt using a discounted cash flow model taking into account the stated interest rate of the credit facility and probabilistic cash flows from the pledged policies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, our estimates are not necessarily indicative of the amounts that we, or holders of the instruments, could realize in a current market exchange. The most significant assumptions are the estimates of life expectancy of the insured and the discount rate. The use of different assumptions and/or estimation methodologies could have a material effect on the estimated fair values.

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The Company determined that the embedded conversion option in the Notes is required to be separately accounted for as a derivative under Accounting Standards Codification ("ASC") 815, Derivatives and Hedging. ASC 815 requires the Company to bifurcate the embedded conversion option and record it as a liability at fair value and reduce the debt liability by a corresponding discount of an equivalent amount. The embedded conversion option is required to be re-measured at fair value at each reporting date with gains or losses recognized in earnings The Company uses a Black Scholes pricing model that incorporates present valuation techniques and reflects both the time value and the intrinsic value of the embedded conversion option to approximate the fair value of the conversion derivative liability at the end of each reporting period. This model requires assumptions as to expected volatility, dividends, terms, and risk free rates.

Fair Value Measurement Guidance

We follow ASC 820, Fair Value Measurements and Disclosures, which defines fair value as an exit price representing the amount that would be received if an asset were sold or that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions the guidance establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. Level 1 relates to quoted prices in active markets for identical assets or liabilities. Level 2 relates to observable inputs other than quoted prices included in Level 1. Level 3 relates to unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Our investments in life insurance policies, structured settlements, Revolving Credit Facility debt and conversion derivative liability are considered Level 3 as there is currently no active market where we are able to observe quoted prices for identical assets/liabilities and our valuation model incorporates significant inputs that are not observable. See Note 11, Fair Value Measurements of the notes to Consolidated Financial Statements for a discussion of our fair value measurement.

Income Recognition from Continuing Operations

Our primary source of income from continuing operations are in the form of change in fair value of life settlements and gains on life settlements, net. Our income recognition policies for this source of income is as follows:

• Change in Fair Value of Life Settlements-When the Company acquires certain life insurance policies we initially record these investments at the transaction price, which is the fair value of the policy for those acquired upon relinquishment or the amount paid for policies acquired for cash. The fair value of the investment in insurance policies is evaluated at the end of each reporting period. Changes in the fair value of the investment based on evaluations are recorded as changes in fair value of life settlements in our consolidated statement of operations. The fair value is determined on a discounted cash flow basis that incorporates current life expectancy assumptions. The discount rate incorporates current information about market interest rates, the credit exposure to the insurance company that issued the life insurance policy and our estimate of the risk premium an investor in the policy would require. The Company recognizes income from life settlement maturities upon receipt of death notice or verified obituary of insured. This income is the difference between the death benefits and fair values of the policy at the time of maturity. • Gains on Life Settlements, Net-The Company recognizes gains from life settlement contracts that the Company owns upon the signed sale agreement and/or filing of ownership forms and funds transferred to escrow.



Income Recognition from Discontinued Operations

Our primary source of income from discontinued operations are in the form realized gains on sales of structured settlements.

Realized Gains on Sales of Structured Settlements-Realized gains on sales of structured settlements are recorded when the structured settlements have been transferred to a third party and we no longer have continuing involvement, in accordance with ASC 860, Transfers and Servicing.

Deferred Costs

Deferred costs include costs incurred in connection with acquiring and maintaining credit facilities. These costs are amortized over the life of the related loan using the effective interest method and are classified as interest expense in the accompanying consolidated statement of operations. These deferred costs are related to the Company's 8.50% senior unsecured convertible notes. The Company did not recognize any deferred cost on its Revolving Credit Facility given all costs were expensed due to electing the fair value option in valuing the Revolving Credit Facility.

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Income Taxes

Prior to our initial public offering in 2011, we converted from a Florida limited liability company to a Florida corporation (the "Conversion"). Prior to the Conversion we were treated as a partnership for federal and state income tax purposes. As a partnership our taxable income and losses were attributed to our members, and accordingly, no provision or liability for income taxes was reflected in the accompanying consolidated financial statements for periods prior to the Conversion.

We account for income taxes in accordance with ASC 740, Income Taxes. Under ASC 740, deferred income taxes are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of enacted tax laws. Deferred income tax provisions and benefits are based on changes to the assets or liabilities from year to year. In providing for deferred taxes, we consider tax regulations of the jurisdictions in which we operate, estimates of future taxable income and available tax planning strategies. If tax regulations, operating results or the ability to implement tax-planning strategies varies adjustments to the carrying value of the deferred tax assets and liabilities may be required. Valuation allowances are based on the "more likely than not" criteria of ASC 740.

Our provision for income taxes is estimated to result in an annual effective tax rate of 38.8% in 2014, except as noted below. For periods prior to 2014 our provision for income taxes is estimated to result in an annual effective tax rate of 0.0%. At March 31, 2013, due to the large losses and the uncertainties that resulted from the USAO Investigation, SEC investigation, Non-Prosecution Agreement and class action lawsuits, we recorded a full valuation allowance against our net deferred tax asset as it was more likely than not that the net deferred tax asset is not realizable. As a result of these increases in the valuation allowance, we recorded no income tax benefit for 2013.

The accounting for uncertain tax positions guidance under ASC 740 requires that we recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. We recognize interest and penalties (if any) on uncertain tax positions as a component of income tax expense.

In March of 2014, the Company was notified by the IRS of its intention to examine the Company's tax returns for the years ended December 31, 2011 and 2012, respectively. The IRS has not started its examination of such tax returns. See also "IRS Investigation" in Note 13, Contingencies and Commitments regarding the IRS Criminal Investigation Division's investigation related to the Company's former structured settlement business.

Stock-Based Compensation

We have adopted ASC 718, Compensation-Stock Compensation. ASC 718 addresses accounting for share-based awards, including stock options and warrants, with compensation expense measured using fair value and recorded over the requisite service or performance period of the award. The fair value of equity instruments awarded upon or after the closing of our initial public offering will be determined based on a valuation using an option pricing model that takes into account various assumptions that are subjective. Key assumptions used in the valuation will include the expected term of the equity award taking into account both the contractual term of the award, the effects of expected exercise and post-vesting termination behavior, expected volatility, expected dividends and the risk-free interest rate for the expected term of the award.

Held-for-sale and discontinued operations

The Company reports a business as held-for-sale when management has approved or received approval to sell the business and is committed to a formal plan, the business is available for immediate sale, the business is being actively marketed, the sale is anticipated to occur during the ensuing year and certain other specified criteria are met. A business classified as held-for-sale is recorded at the lower of its carrying amount or estimated fair value less cost to sell. If the carrying amount of the business exceeds its estimated fair value, a loss is recognized. Depreciation is not recorded on assets of a business classified as held-for-sale. Assets and liabilities related to a business classified as held-for-sale are segregated in the Consolidated Balance Sheet and major classes are separately disclosed in the notes to the Consolidated Financial Statements commencing in the period in which the business is classified as held-for-sale. The Company reports the results of operations of a business as discontinued operations if the business is classified as held-for-sale, the operations and cash flows of the business have been or will be eliminated from the ongoing operations of the Company as a result of a disposal transaction and the Company will not have any significant continuing involvement in the operations of the business after the disposal transaction. The results of discontinued operations are reported in Discontinued Operations in the Consolidated Statement of Operations for current and prior periods commencing in the period in which the business meets the criteria of a discontinued operation, and include any gain or loss recognized on closing or adjustment of the carrying amount to fair value less cost to sell.

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Recent Accounting Pronouncements

Note 2, Principles of Consolidation and Basis of Presentation of the Notes to Consolidated Financial Statements discusses accounting standards adopted during the three months ended March 31, 2014.

Results of Operations

The following is our analysis of the results of operations for the periods indicated below. This analysis should be read in conjunction with our financial statements, including the related notes to the financial statements. Our results of operations are discussed below in two parts: (i) our consolidated results of continuing operations and (ii) our results of discontinued operations.

Results of Continuing Operations

Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013

Net loss from continuing operations for the quarter ended March 31, 2014 was $3.3 million as compared to a net loss of $5.3 million for the quarter ended March 31, 2013, an improvement of $2.0 million. Total income from continuing operations was $13.6 million for the quarter ended March 31, 2014, an increase of $10.3 million over total income from continuing operations of $3.3 million during the same period in 2013. Total expenses from continuing operations were $12.9 million for the quarter ended March 31, 2014 compared to total expenses from continuing operations of $8.6 million incurred during the same period in 2013, an increase of $4.4 million, or 51%.

Our net loss for the quarter ended March 31, 2014 includes an income tax provision of approximately $4.0 million which resulted from the adoption of ASU No. 2013-11. See Note 15 "Income Taxes," to the accompanying consolidated financial statements.

Change in Fair Value of Life Settlements. Change in fair value of life settlements was a gain of approximately $14.0 million for the quarter ended March 31, 2014 compared to $1.8 million for the quarter ended March 31, 2013, an increase of $12.1 million.

During the quarter ended March 31, 2014, five life insurance policies with face amounts totaling $11.5 million matured compared to two policies with face amount of $6.0 million for the same period in 2013. The net gain on these maturities was $10.6 million and $4.9 million for 2014 and 2013, respectively, and is recorded as a change in fair value of life settlements in the consolidated statements of operations for the quarters ended March 31, 2014 and 2013, respectively. Expected proceeds from these maturities for 2014 totaling $11.5 million are included in receivable for maturity of life settlements at March 31, 2014. All five maturities served as collateral under the Revolving Credit Facility.

As of March 31, 2014, the Company owned 601 policies with an estimated fair value of $315.5 million compared to 612 policies with a fair value of $303.0 million at December 31, 2013, an increase of $12.5 million or 4%. Of the 601 policies, 452 policies were pledged to the Revolving Credit Facility and 149 policies were not pledged. During the quarter ended March 31, 2013, the Company acquired eight life insurance policies as a result of certain Company's borrowers defaulting on premium finance loans and relinquishing the underlying policies to the Company. There have been no such acquisitions to date in 2014. As of March 31, 2014, the aggregate death benefit of the Company's investment in life settlements is $2.9 billion.

Of these 601 policies owned as of March 31, 2014, 558 were previously premium financed and are valued using discount rates that range from 16.80% - 26.80%. The remaining 43 policies are valued using discount rates that range from 14.80% - 20.80%. See Note 11, "Fair Value Measurements," to the accompanying consolidated financial statements.

Gain/(Loss) on life settlements, net. Loss on life settlements, net was approximately $360,000 for the quarter ended March 31, 2014 compared to zero as of March 31, 2013. During the quarter ended March 31, 2014, six policies were sold resulting in a loss of approximately $360,000 with net proceeds received of $2.9 million. There was no sale of policies during the quarter ended March 31, 2013.

Servicing Fee Income. Servicing income was zero for the quarter ended March 31, 2014 compared to $234,000 in 2013, a decrease of $234,000. Servicing fee income was earned in providing asset servicing for third parties, which we began providing during the fourth quarter of 2010. This decrease was due to the Company ceasing servicing assets for unaffiliated third parties on April 30, 2013.

Other Income. Other income was $4,000 for the quarter ended March 31, 2014 compared to $1.2 million in 2013, a decrease of $1.1 million. The amount for 2013 is attributable to a write off of liabilities which were payable to a third party.

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Expenses

Interest expense. Interest expense increased to $2.8 million during the quarter ended March 31, 2014, compared to $103,000 during the same period in 2013, an increase of $2.7 million, as the principal on the Company's outstanding debt increased to $212.9 million as of March 31, 2014. Outstanding debt includes $142.2 million of outstanding principal, which relates to the Revolving Credit Facility and $70.7 million of Notes. Of the interest expense of $2.8 million, approximately $1.8 million represents interest paid on the Revolving Credit Facility. We expect interest expense on the Revolving Credit Facility to increase in 2014 as we continue to borrow funds under this facility. We also expect interest expense on the Notes to increase in 2014 as the interest expense was not incurred for the entire quarter. Interest expense also includes $668,000, $250,000 and $49,000 representing interest payable and amortization of debt discount and issuance costs, respectively, on the Notes. The Company borrowed $45.0 million under a bridge facility during the quarter ended March 31, 2013. Interest expense of $100,000 is associated with this facility for the quarter ended March 31, 2013. See Notes 9, Revolving Credit Facility and 10, 8.50% Senior Unsecured Convertible Notes to the accompanying consolidated financial statements.

Change in fair value of Revolving Credit Facility. Change in fair value of Revolving Credit Facility was approximately $1.1 million for the quarter ended March 31, 2014 compared to zero for the quarter ended March 31, 2013. This change is associated with the adoption of the fair value option in accounting for the Revolving Credit Facility and the lengthening of life expectancy estimates for the policies in the Revolving Credit Facility. The Revolving Credit Facility is valued at March 31, 2014 using a discount rate of 23.90%. See Note 11, "Fair Value Measurements," to the accompanying consolidated financial statements.

Change in fair value of conversion derivative liability. Change in fair value of conversion derivative liability embedded in the Notes was approximately $2.1 million for the quarter ended March 31, 2014 compared to zero for the quarter ended March 31, 2013. ASC 815, Derivatives and Hedging, requires the Company to bifurcate the embedded conversion option that was valued on February 21, 2014 and March 31, 2014 and resulted in a fair value loss of approximately $2.1 million for the quarter ended March 31, 2014.

Selling, General and Administrative Expenses. SG&A expenses were $7.0 million for the quarter ended March 31, 2014 compared to $8.4 million in 2013. This was primarily a result of a $2.0 million reduction in legal fees, $96,000 reduction in D&O insurance expense and $74,000 reduction in other SG&A expenses. These reductions were offset by an increase in professional fees of $369,000 and personnel cost of $305,000.

Legal expenses for the quarter ended March 31, 2014 were $2.8 million compared to $4.8 million for 2013. Of the legal expense, approximately $784,000 is mainly associated with the USAO Investigation for 2014, compared to $1.4 million for the quarter ended March 31, 2013. Legal expense also includes approximately $2.3 million associated with the warrants for the class action litigation for the quarter ended March 31, 2013. See Note 13, "Commitments and Contingencies," to the accompanying consolidated financial statements.

Results of Discontinued Operations

Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013

Net loss from our discontinued structured settlement operations for the quarter ended March 31, 2014 was $19,000 as compared to income of $1.0 million for the quarter ended March 31, 2013. Total income from our discontinued structured settlement operations was $75,000 for the quarter ended March 31, 2014 compared to $4.2 million in 2013. This reduction is mainly associated with the disposal of the structured settlement operations in October 2013. During the quarter ended March 31, 2014, our discontinued structured settlement operations sold 8 structured settlements for a gain of $18,000, compared to 164 structured settlements for a gain of $3.5 million. Unrealized change in fair value of structured settlements receivable was $8,000 for the quarter ended March 31, 2014 compared to $545,000 for the quarter ended March 31, 2013.

Total expenses from our discontinued structured settlement operations were $94,000 for the quarter ended March 31, 2014 compared to $3.2 million incurred during the same period in 2013. This reduction is mainly associated with the disposal of the structured settlement operations in October 2013, including a $1.5 million decrease in personnel cost, $811,000 decrease in marketing cost, $257,000 decrease in legal fees, $298,000 decrease in professional fees and $259,000 decrease in other SG&A expenses.

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Continuing Operations-Selected Operating Data (dollars in thousands):

Life Finance For the Three Months Ended March 31, 2014 2013 Period Acquisitions - Policies Owned Number of policies acquired - 8 Average age of insured at acquisition - 76.8 Average life expectancy - Calculated LE (Years) - 12.3 Average death benefit $ - $ 4,094 Aggregate purchase price $ - $ 1,524 End of Period - Policies Owned Number of policies owned 601 220 Average Life Expectancy - Calculated LE (Years) 11.4 10.8 Aggregate Death Benefit $ 2,920,399$ 1,099,906 Aggregate fair value $ 315,464$ 117,732 Monthly premium - average per policy $ 7.5 $ 10.4 End of Period Loan Portfolio Loans receivable, net $ - $ 1,769 Number of policies underlying loans receivable - 14



Aggregate death benefit of policies underlying loans receivable

$ - $ 56,900 Number of loans with insurance protection - 5 Loans receivable, net (insured loans only) $ - $ 93 Average Per Loan: Age of insured in loans receivable - 75.8 Life expectancy of insured (years) - 15.6 Monthly premium $ - $ 5 Loan receivable, net $ - $ 126 Interest rate - 12.5 % 37



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Discontinued Operations-Selected Operating Data (dollars in thousands):

Structured Settlements: For the Three Months Ended March 31, 2014 2013 Period Originations: Number of transactions 3 171 Number of transactions from repeat customers 2 85 Average purchase discount rate 15.0 % 17.4 %



Face value of undiscounted future payments purchased $ 733$ 30,721 Amount paid for settlements purchased

$ 117$ 5,539 Marketing costs $ - $ 811 Selling, general and administrative (excluding marketing costs) $ - $ 3,138



Average Per Origination During Period: Face value of undiscounted future payments purchased $ 244 $ 180 Amount paid for settlement purchased

$ 39 $ 32 Time from funding to maturity (months) 242 155 Marketing cost per transaction $ - $ 5 Segment selling, general and administrative (excluding marketing costs) per transaction $ - $ 18 Period Sales: Number of transactions originated and sold 8 163



Realized gain on sale of structured settlements $ 18$ 3,541 Average sale discount rate

10.5 % 9.8 % End of Period Portfolio: Number of transactions on balance sheet 50 97



Liquidity and Capital Resources

Our consolidated financial statements have been prepared assuming the realization of assets and the satisfaction of liabilities in the normal course, as well as continued compliance with the covenants contained in the Revolving Credit Facility and other financing arrangements.

As of March 31, 2014, the Company's cumulative legal and related fees in respect of the USAO Investigation (including indemnification obligations), the SEC Investigation and related matters were $35.5 million, including $784,000 and $1.4 million incurred during the three months ended March 31, 2014 and 2013, respectively. We believe we may continue to spend significant amounts on these matters as well as the IRS Investigation, and for general litigation and judicial proceedings over the next year, and possibly beyond. In addition, as part of the framework for the class action and derivative litigation settlements described in Note 13, Contingency and Commitments to our consolidated financial statements, the Company has undertaken to advance legal fees and indemnify certain individuals covered under the director and officer liability insurance policies. The remaining obligation to advance and indemnify on behalf of these individuals, while currently unquantifiable, may be substantial and could have an adverse effect on the Company's financial position and results of operations.

We expect to meet our liquidity needs for the next year primarily through our cash resources. While the liquidity risk associated with the policies that have been pledged as collateral under the Revolving Credit Facility has been mitigated, any available proceeds under the facility's waterfall provisions will generally be directed to pay outstanding interest and principal on the loan unless the lenders determine otherwise. Accordingly, there can be no assurance as to when the proceeds from maturities of the policies pledged as collateral under the Revolving Credit Facility will be distributed to the Company. The Company must proactively manage its cash in order to effectively run its businesses, maintain the policies that have not been pledged under the Revolving Credit Facility and opportunistically grow its assets. The Company may in the future pledge and/or borrow against certain or all of the 149 policies that have not been pledged under the Revolving Credit Facility, the majority of which had historically been maintained by the lender protection insurance provider. It may also determine to sell all or a portion of these policies and, under certain circumstances, lapse certain of these policies as its portfolio management strategy and liquidity needs dictate. The lapsing of policies, if any, would create losses as such assets would be written down to zero.

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Financing Arrangements Summary

Revolving Credit Facility

Effective April 29, 2013, White Eagle entered into a 15-year Revolving Credit Facility with LNV Corporation, as initial lender, Imperial Finance & Trading, LLC, as servicer and portfolio manager and CLMG Corp., as administrative agent (the "Agent"). For a description of the facility see Note 9, Revolving Credit Facility of the notes to Consolidated Financial Statements.

At March 31, 2014, the fair value of the debt was $134.0 million. As of March 31, 2014, the borrowing base was approximately $145.3 million including $142.2 million in outstanding principal. See Note 11, "Fair Value Measurements."

There are no scheduled repayments of principal. Payments are due upon receipt of death benefits and distributed pursuant to the waterfall as described above.

8.50% Senior Unsecured Notes Due 2019

In February 2014, we issued $70.7 million in aggregate principal amount of 8.50% senior unsecured convertible notes due 2019. For a description of the Notes see Note 10, 8.50% Senior Unsecured Convertible Notes of the notes to Consolidated Financial Statements.


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